Management of Working Capital - - The Most Important Area of a Business Whether Small Medium or Big

Working capital management is the term used to describe day to day management of activities which affect operational cash flow.

Effective working capital management means you need to implement business processes that will successfully achieve your three main objectives:

• Ensure cash is available to meet payment requirements as they fall due. This is critical.

• Optimize working capital in your business.As working capital is money tied up in your business operations, it must be funded from somewhere. Most businesses fund working capital from a bank overdraft or loan. This costs interest. If you don't manage it well, it will cost you more than necessary.

• Ensure enough working capital is available to fund any planned business growth.

Management of Debtors

Customers with Credit Terms

This function is also known as credit control. In principal the task is to make sure you collect money in a timely manner, and don't give too much credit to a customer. As ever, prevention is better than cure:

• Before you grant credit to a customer make sure you get proper references from other suppliers the customer uses.

• Perform a credit check with an approved credit rating agency. At first, keep the credit limit small until you are happy that they are paying regularly and on time. Don't extend your credit limit unless you are asked by the supplier. Don’t extend the credit limit beyond the amount approved by the credit rating agency.

• Do maintain regular contact with the payments department of your customer. Then if they haven't paid on time you already have a good working relationship, and can raise the topic of payment as soon as it arises. Keep a diary and record what the customer promises in respect of payment. Call as soon as the agreed date arrives if you haven't received payment. Implement an escalating series of demand letters so you have a clear audit trail should the worse happen.

• Spread your business around a portfolio of customers, and don't become too dependent on one customer for business, because if they get into trouble and go bust you might too. Consider credit insurance to guard against this scenario.

Management of Creditors

Suppliers with Credit Terms

The objective here is to smooth creditor payments so that you are paying suppliers in line with how the cash flows into your business.

• Pay suppliers on time. The last thing you need is an essential supplier refusing to deliver essential products or services to you.

• It is quite common for businesses that are not managing working capital effectively to lean on suppliers to fund shortfalls. This manifests itself as not having the cash available to pay the supplier on time, and so you have to pay late. You are in effect taking advantage of their credit terms.

• Again, don't be too dependent upon one supplier, so you can always obtain the goods you need to stay in business

Inventory Management

If you make or buy goods to sell in your business, then this must be paid for from somewhere. If those items are sat on the shelf, remaining unsold before you have to pay the suppliers then you have to find that money from somewhere. That will cost you.

Also, the more inventory you have, the more space you need to store it. This too has a cost associated with it. Some products also have a shelf life, so spoilage and obsolesence can become significant.

Make a point of regularly going through your inventory records, and develop initiatives to move slow moving stock.